Monetary Policy

The actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as increasing the interest rate, or changing the amount of money banks need to keep in the vault (bank reserves).Economicstrategychosen by agovernmentin deciding expansion orcontractionin thecountry'smoney-supply.Appliedusually through thecentral bank, amonetarypolicy employs three majortools: (1)Buyingorsellingnational debt, (2) Changingcreditrestrictions, and (3) Changing theinterest ratesby changingreserve requirements.

Monetary policy plays the dominantroleincontrolof theaggregate-demandand, byextension, ofinflationin aneconomy. Alsocalledmonetary regime The experience of the State Bank of Pakistan (SBP) in conducting the monetary policy of the country over the years comprises a whole range of regimes. While the overall objectives of monetary policy have remained the same, policy contents intermediate targets, choice of instruments and controls etc. have varied considerably over the years.

Monetary Policy 1972-88 Monetary policy during this period was characterized by: (1) Creation of National Credit Consultative Council (NCCC) and Annual Credit Plan, 1972 (2) Regimes of credit ceilings with effect from October 1973 3) Directed, concessionary and mandatory credit targets 4) Targets for fixed investment and exports (5) Control on bank deposits and lending rates

The table below shows economic growth, monetary expansion and changes in prices, during 1972-88. Table-4: Inflationary Gap 1972-1988 (in percentage) End June Consumer Price Index (CPI) Monetary Growth GDP Growth (fc) Inflationary Gap

(a) (b) (c) (b-c)

1972 4.7 3.6 2.1 1.5

1973 9.7 22.7 6.7 16.0

1974 30.0 13.3 7.0 6.3

1975 26.7 7.8 3.3 4.5

1976 11.7 25.9 3.4 22.5

1977 11.8 24.3 2.8 21.5

1978 7.8 23.0 7.8 15.2

1979 6.6 23.5 5.6 17.9

1980 10.7 17.6 6.9 10.7

1981 12.4 13.2 6.2 7.0

1982 11.1 11.4 7.6 3.8

1983 4.7 25.3 6.8 18.5

1984 7.3 11.8 4.0 7.8

1985 5.7 12.6 8.7 3.9

1986 4.4 14.8 6.4 8.4

1987 3.6 13.7 5.8 7.9

1988 6.3 12.3 6.4 5.9

Average 10.3 16.3 5.7 10.6